The short answer is – it depends on your plan. Retirement plan participant loans are an optional feature of qualified plans.
The IRS and Department of Labor dictate the loan limits and manner by which retirement plan loans and repayments can be made. The plan must contain a written loan policy explaining the requirements and terms; loans must be available to all participants. Here’s a summary:
The maximum loan you can request is the lesser of 50 percent of your vested account balance or $50,000. This limit is further reduced by your highest loan balance against the retirement plan in the past 12 months (if you have one).
For example, if you have a $100,000 vested balance and no current loans outstanding, the maximum available loan would be $50,000; however, if you had just repaid a plan loan, and the highest unpaid balance during the previous 12 months was $5,000, the maximum available would only be $45,000. This is to discourage participants from habitually refinancing their plan loans.
The maximum repayment period is five years. If you take out a loan to buy a house, the loan can be paid back over the same length of time as a mortgage. However, most plans recommend no more than a 15-year payback. Why?
Payments are made via payroll deduction, so you have to work for the same company while you repay the loan. If you change companies before the term of the loan, you’ll have to pay the remaining unpaid balance. Otherwise, you’ll pay taxes on the unpaid balance because it will be considered a distribution from your retirement plan.
Repayments must be made at least quarterly in level amounts, and no balloon repayments are permitted. Repayments can be suspended for leaves of absence up to one year, or indefinitely for military service. But if your leave is not military-related, the repayment terms must be adjusted upon re-employment to ensure that the original five-year period is not exceeded. You can make payments while on leave, and there aren’t generally pre-payment penalties, so your retirement loan can always be paid off before maturity.
You’ll want to work closely with your plan administrator to ensure that:
- you don’t exceed the maximum allowable balance
- the loan is fully repaid during the allowable repayment period
- and payments are made in a timely manner.
Because the Department of Labor is stepping up enforcement on retirement plan loans and repayments, any errors in the administration of the loan can result in the participant being taxed for the distribution. Failure to correct errors can also put qualification of the plan at risk.
If you are a plan sponsor, your plan’s third party administrator can assist you in developing loan policies, incorporating the policies into your written plan document and making sure that your retirement plan remains in compliance with the DOL and IRS regulations.